Paradoxes and irrationality in economics
The Paradox of Thrift: When individuals try to save more during an economic downturn, it actually reduces overall demand, slowing economic recovery and potentially worsening the downturn. While saving is rational for individuals, it’s irrational at the collective level during a recession. The Allais Paradox: This demonstrates that people’s choices violate expected utility theory. Even when outcomes have clear probabilities and values, people often choose options that don’t maximize their expected utility, highlighting irrational behavior in decision-making. The Endowment Effect: People tend to overvalue things they own, even if they acquired them very recently. For example, a person who just received a coffee mug might demand a higher price to sell it than they would be willing to pay to buy an identical mug, showing irrational attachment to possessions. Giffen Goods Paradox: For certain inferior goods, demand increases as the price rises, which is counterintuitive. This parado